Interest Rate Cut By RBA – What Does It Mean For You?

The recent drops have come faster and dropped further then ever before. The rates are currently some of the lowest that have been available in nearly twenty years.

These "interest rate cuts" have become more newsworthy during the recent economic crisis because the Reserve Bank has dropped rates at an alarming rate. When the economy is healthy there are still small interest rate cuts and rises. Typically the interest rate will move up or down by .25 percent. However, these movement are slow and far between. It took the Reserve Bank of Australia almost six years to get interest rates up to the level they were before they started dropping them to record low rates. Those drops happened in about three months.

In order to understand how an interest rate cut might affect you personally you must first understand why the rates change at what factors affect those changes. Policymakers in the government use an interest rate cut to help regulate the amount of money available in the economy. Here in Australia it is done by the RBA, in the United States it is their Federal Reserve Bank and in the European Zone it is ECB. These central banks each have the power to regulate interest rates based on economic conditions and future forecasts. Based on these factors they choose whether to raise or decrease interest rates. They are also able to buy and sell securities backed by the government as another interest rate control. Cutting interest rates is a way to comb at inflation and stimulate economic growth.

What causes an interest rate cut?

InflationWhen inflation rates are high the central banks of any given country will cut the interest rate. By cutting the rate they make it cheaper to borrow money and increasing demand for good. This process in turn reduces the costs of production which helps to curb inflation. The relationship between inflation and an interest rate cut is considered to be an inverse relationship.

Government borrowingThe central bank of a country is that countries biggest borrows. They borrow from the central bank in order to run government programs or to manage policy changes. When the government demand for these loans is low it lowers the pressure on interest rates, in turn when the demand is high it puts upward pressure on interest rates.

Global conditionsWe live in a world that is completely interconnected so what happens in one country usually affects what happens in all of the major economies. In many cases it is the United States dollar that is primarily used for international trade. When the value of the United States dollar rises and falls it can impact domestic economies causing their banks to raise or decrease interest rates.

An interest rate cut can also effect the stock market. When rates decrease consumers are encouraged to borrow money from banks. Companies make financial investments of companies and other plans for expansion because of the lower rates. Both of these actions increase the amount of money in the economy and boost spending. This boost helps to move the stock market upward and has a positive affect on the prices of stock. By the same token, an interest rate cut could lead to a loss in earnings for people who have money deposited in banks or invested in equities. But, if your money is in bonds, those prices get a boost from the cuts.

How an interest rate cut affects you

Now that you understand all about an interest rate cut you are probably still wondering how it directly affects you, the consumer. Aside from affecting you because of the overall impact it has on the economy it also affects how much or how little a mortgage will cost. The impact of the cost of mortgages is a huge factor in how much money everyone has to spend and the stability of the economy. When rates fluctuate it controls how much money there is in household budgets, in turn affecting how much money is spent in the community. It is truly all connected.

Home owners If you already own your home an interest rate cut can lead to more money in your pocket because it decreases the cost of your mortgage. We say can because banks are not required to pass the full interest cut down to customers, although they often do. Sometimes it is less then the full cut or sometimes banks will pass on none. However, with a variable interest rate loan you should be able to feel the affects of most interest rate cuts.

Home buyers If you are in the market for a home loan it might seem like the ideal time to buy when interest rates are low. That is true, but only in the short term. Here in Australia rates can only be fixed for three to five years. If you take out a mortgage when rates are very low you could see a rise in your mortgage amount as rates increase. Buyers must be careful to buy a home that they can afford even when rates increase.

An interest rate cut is often a good thing for the economy because it helps put more money in the system. Just be aware that as it falls it can also rise, so protect yourself by taking out loans you can afford even when the rates go back on the rise.

All 33 experts from Australia's biggest cash rate survey, the finder.com.au Reserve Bank Survey, correctly guessed no change for the Melbourne cup November meeting for 2014. An average of their forecasts suggests the cash rate will rise in August 2015, peak at 4% in 2017 and begin falling from 2018.

Ask a Question

Do not enter personal information (eg. surname, phone number, bank
details) as your question will be made public

finder.com.au is a financial comparison and information service, not a bank or
product provider

We cannot provide you with personal advice or recommendations

Your answer might already be waiting – check previous questions
below to see if yours has already been asked

Your Question

Subscribe to our newsletter

Notify me of followup comments via e-mail.

Disclaimer: At finder.com.au we provide factual information and general advice. Before
you make any decision about a product read the Product Disclosure Statement and consider
your own circumstances to decide whether it is appropriate for you.
Rates and fees mentioned in comments are correct at the time of publication.
By submitting this question you agree to the finder.com.au privacy policy,
receive follow up emails related to finder.com.au and to create a user account where further
replies to your questions will be sent.

Disclaimer -
Hive Empire Pty Ltd (trading as finder.com.au, ABN: 18 118 785 121) provides factual information, general advice and services on financial products as a Corporate Authorised Representative (432664) of Advice Evolution Pty Ltd AFSL 342880. Please refer to our FSG - Financial Products. We also provide general advice on credit products under our own Credit Licence ACL 385509. Please refer to our Credit Guide for more information. We can also provide you with general advice and factual information on about a range of other products, services and providers. We are also a Corporate Authorised Representative of Countrywide Tolstrup Financial Services Group Pty Ltd. ABN 51 586 953 292 AFSL 244436 for the provision of general insurance products. Please refer to our FSG - General Insurance. We hope that the information and general advice we can provide will help you make a more informed decision. We are not owned by any Bank or Insurer and we are not a product issuer or a credit provider. Although we cover a wide range of products, providers and services we don't cover every product, provider or service available in the market so there may be other options available to you. We also don't recommend specific products, services or providers. If you decide to apply for a product or service through our website you will be dealing directly with the provider of that product or service and not with us.
We endeavour to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide. If you are unsure you should get independent advice before you apply for any product or commit to any plan. (c) 2016.

Important information about this website

finder.com.au is one of Australia's leading comparison websites. We compare from a wide set of major banks, insurers and product issuers.

finder.com.au has access to track details from the product issuers listed on our sites. Although we provide information on the products offered by a wide range of issuers, we don't cover every available product. You should consider whether the products featured on our site are appropriate for your needs and seek independent advice if you have any questions.

The identification of a group of products, as 'Top' or 'Best' is a reflection of user preferences based on current website data. On a regular basis, analytics drive the creation of a list of popular products. Where these products are grouped, they appear in no particular order.

Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment.

We try to take an open and transparent approach and provide a broad based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.

Some product issuers may provide products or offer services through multiple brands, associated companies or different labelling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.

Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.

Please read our website terms of use for more information about our services and our approach to privacy.